January 2024
Bonding Time: Risk Management Lessons from the 1980s and 1990s
MFS' thoughtful, long-term approach to bond funds in the 1980s and 1990s was validated when a currency crisis in Europe and Russia tanked the value of global short-term bonds.
When most people think of the 1980s, music videos, big hair and Princess Diana often come to mind. But this was also a time when bond mutual funds exploded onto the scene. In 1975, there were only 35 in existence, but by the end of the 1980’s, there were nearly 1,000.1
MFS’ fixed income business was also growing throughout the 1980s. MFS launched the industry’s first global bond fund, the MFS International Bond Fund, and the MFS Municipal High Income Fund, the first closed-end, high-yield municipal bond fund ever traded on the New York Stock Exchange.
MFS’ active fixed income management was a hallmark of these funds, as MFS selected bonds based on the financial strength of a company in order to reduce the risk of it not making interest payments or paying back principle. Unlike a stock price that can rise forever in theory, bond prices typically don’t rise above their value at maturity.
The deepening of MFS’ risk management approach for fixed income during this period only strengthened the firm’s commitment to rejecting the big financial fads that many other firms were drawn into, protecting clients over the long term.
The deepening of MFS’ risk management approach for fixed income during this period only strengthened the firm’s commitment to rejecting the big financial fads that many other firms were drawn into, protecting clients over the long term.
Joan Batchelder, one the firm’s fixed income leaders, was an instrumental part of MFS’ decisions at the time. She acknowledged the firm’s desire for growth, but underscored the importance of staying vigilant and fully understanding the culture and management of a company before investing, because, as she said, “If we’re wrong, what’s the downside protection?” For Batchelder, it couldn’t just be about a “good deal” — the company had to have something behind it she could trust. Batchelder’s perspective aligned with the firm’s own plan: maintain proper risk controls and vet every investment opportunity with extra scrutiny.
As the 1980s gave way to the early 1990s, MFS’ approach to risk management remained the same, and the firm ignored the new growing frenzy over short-term global bond funds. Many in the industry wondered why MFS would reject these products when it seemed like the ideal time to launch them.2 A 1991 New York Times article profiling the funds’ sudden popularity did include MFS’ dissenting opinion. Leslie Nanberg, one of MFS’ fixed income leaders at the time, suggested this newfound infatuation came with risks that not enough people were taking seriously.3 Her concerns proved true when a devastating currency crisis rippled across the United Kingdom and Russia in 1992, wreaking havoc on short-positioned funds and validating MFS’ position.
It wasn’t just in the 1980s and 1990s. Over the past 100 years, MFS’ leaders have regularly warned against chasing the financial fads of the moment, choosing instead to closely engage with companies and know them inside and out, while assessing what’s happening in the world. By recognizing and adapting to those transformational forces with deep forethought and intentionality, MFS has been able to distinguish short-term noise from the real opportunities to create long-term value.
Please note: Not all of the funds included in this material may be available for sale in your country.
Endnotes